Embraer of Brazil. Embraer of Brazil is one of the two leading global manufacturers of regional jets(Bombardier of Canada is theother). Regional jets are smaller than the traditional civilian airliners produced by Airbus andBoeing, seating between 50 and 100 people on average. Embraer has concluded an agreement with a regional U.S. airline to produce and deliver four aircraft one year from now for $85 million.

Although Embraer will be paid in U.S.dollars, it also possesses a currency exposure of inputsit must pay foreign suppliers $15 million for inputs one year from now(but they will be delivering the subcomponents throughout theyear). The current spot rate on the Brazilian real(R$) is R$1.8297/$, but it has been steadily appreciating against the U.S. dollar over the past three years. Forward contracts are difficult to acquire and are considered expensive. Citibank Brasil has not explicitly provided Embraer a forward ratequote, but has stated that it will probably be pricing a forward off the current 4.00% U.S. dollar eurocurrency rate and the 10.50% Brazilian government bond rate. Advise Embraer on its currency exposure.

ow much of net cash position in Brazilian reais will Embraer receive in one year without a hedge if the expected spot rate in one year is expected to be R$1.8297/$?

R$

nothing

(Round to the nearest wholenumber.)

How much in Brazilian reais will Embraer receive in one year if the net cash position is covered by aone-year forwardcontract?

R$

nothing

(Round to the nearest wholenumber.)

"In this case because the real is selling forward at a considerablediscount, the net long positionif sold forwardyields considerably more reais than the current spotrate."

The above statement is

false

true

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